Nippon Chemi-Con Group positions risk management as the highest priority matter involving corporate leadership. Nippon Chemi-Con Group has established a Risk Management Committee in accordance with our Basic Policy for Risk Management. This committee is responsible for the centralized management of Group risks. We categorize existing and potential risks as strategic risks, financial risks, hazard risks, and operational risks. Twice a year, these risks are evaluated by the Risk Management Committee, which provides reports during Executive Committee Meetings.
Among identified and reported risks, the following are major risks with the potential to impact the operating results, stock price, cash flow, and financial position of consolidated companies. Furthermore, forward-looking statements are judgments made by the Nippon Chemi-Con Group at the end of the consolidated fiscal year 2019 (March 31,2020).
1. Risks concerning economic conditions
Nippon Chemi-Con Group's principle business is manufacturing and sales of capacitors and other electronic components. Our business has expanded globally, covering regions including Japan, Americas, Europe and Asia, and therefore, changes in the economic conditions of these regions and countries, where our products are sold, have the potential to impact the operating results and financial position of Nippon Chemi-Con Group.
2. Risks concerning exchange rate fluctuations
Products of Nippon Chemi-Con Group are sold not only in Japan but also in Americas, Europe and Asia, and the proportion of consolidated net sales accounted for by overseas sales stood at 77.8% in the FY2018, and 76.0% in the FY2019. Although we forward exchange contracts to hedge the risk of exchange rate fluctuations, it is impossible to eliminate all such risk, and therefore such fluctuations may affect the operating results of Nippon Chemi-Con Group.
In preparing consolidated financial statements, those of our foreign affiliates are converted to JPY. Even if the values remain unchanged in local currencies, yen translations may fluctuate and thereby affect our business results.
3. Risks concerning price competition
Emerging manufacturers from China and Taiwan are increasing cost competition in aluminum electrolytic capacitors, which is the core product among electronic components manufactured and sold by Nippon Chemi-Con Group. Although we deal with the intensified competition by reducing costs, developing high-value added products and reorganizing overseas production system, the increased competition at the lower end of the market may affect operating results and financial position of Nippon Chemi-Con Group.
4. Risks concerning raw material price fluctuations and procurement
Nippon Chemi-Con Group operating results and financial position may be impacted by cost increases attributable to increased procurement prices for raw materials such as aluminum foils and heavy oil or delays in product shipments caused by difficulty in procuring raw materials.
Nippon Chemi-Con Group implements various risk avoidance measures, including promoting continuous cost reductions by engaging in local procurement at overseas manufacturing companies and pursuing productivity improvements. Nippon Chemi-Con Group also purchases raw materials from multiple suppliers and engages in regular credit management of our suppliers. However, Nippon Chemi-Con Group operating results and financial position could be impacted in the event of an extreme increase in raw material prices or extensive raw material shortages caused by natural disasters or other conditions.
5. Risks concerning product defects
Nippon Chemi-Con Group conducts manufacturing at each global production site in accordance with globally recognized quality management standards (UL standards, AEC-Q200, etc.).
However, there is no guarantee that we will not experience product defects in any of our products at some point in the future. Although we do have product liability insurance, there is no guarantee that this insurance will be sufficient to fully cover liability compensation amount.
Furthermore, we have obtained certification such as ISO9001 and IATF16949 at all manufacturing sites as part of efforts to strengthen quality management. However, Nippon Chemi-Con Group operating results and financial position could be impacted by the occurrence of a large-scale product defect.
6. Risks concerning laws and public regulations
Significant changes in laws and public regulations in regions both at home and overseas, where Nippon Chemi-Con Group operates its business, may influence the business results and financial position of Nippon Chemi-Con Group. Besides expenses to comply with such regulations, criminal penalties and administrative actions including governmental charges or payment of compensation in case of violation against laws and public regulations, may also influence the business results and financial position of Nippon Chemi-Con Group.
Nippon Chemi-Con Group's business is subject to environmental regulations, and introduction of new regulations or the significant changes in the existing ones may pose the risk of environmental responsibility to Nippon Chemi-Con Group.
Nippon Chemi-Con Group is using legal means to respond to some decisions by the competition law authorities of various countries to assess fines against our Group in relation to aluminum electrolytic capacitor transactions. Separately from the above, civil lawsuits have been filed against Nippon Chemi-Con and our subsidiaries in relation to this case in the United States and Canada.
If these legal proceedings result in unfavorable verdicts, there is the possibility of an impact on the operating results and financial position of Nippon Chemi-Con Group.
7. Risks concerning natural disasters and unpredictable events
Nippon Chemi-Con Group operating results and financial position could be impacted by a stop in production caused by facility damage or difficulty in supplying electricity or water due to natural disasters such as earthquakes or some unpredictable events. Furthermore, the spread of the COVID-19 pandemic has become an actualized risk but we are implementing measures to ensure the stable continuation of operations, including adopting staggered office hours and various infection prevention measures. Under the awareness that the continued expansion or prolongation of the pandemic could cause market stagnation, we will continue to engage in information gathering and working with authorities as we implement various measures aimed at minimizing the impact on business. We also will continue to place our highest priority on the safety and health of our employees and stakeholders by using remote working tools and other measures to continue business operations.
8. Risks concerning serious phenomena related to assumptions regarding business continuity
Due to the value of consolidated fiscal year-end (March 31,2020) net assets dropping below certain levels, Nippon Chemi-Con Group is currently infringing on the financing restrictions stipulated in the syndicated loan and certain loan agreements. However, we have received acknowledgement from the relevant financial institutions that no measures will be taken to exercise the right to accelerate payments.